Personal finance can be daunting, but familiarizing yourself with basic money concepts — like how to build wealth, stay out of debt, and earn returns on your investments — will, quite literally, pay off.
To help you get started, we turned to the latest edition of Beth Kobliner’s book “Get a Financial Life: Personal Finance In Your Twenties and Thirties,” released in April 2017. At the start of her book, Kobliner offers a cheat sheet of eight “need-to-know” personal finance basics.
“No kidding around: Adopting even one or two of these strategies will put you ahead of the game and — I promise — make a big difference sooner than you think,” she writes.
Still, Kobliner warns, simply relying on these “crib notes” and ignoring her comprehensive dive into each topic in the following chapters is akin to reading Shakespeare’s “Hamlet” only by the Sparknotes version: “You’ll get the basic plotline but never understand what all the fuss is about.”
So, start with these eight simple rules, listed by Kobliner in “rough order of importance,” and build on your knowledge from there.
1. Get health insurance
Every American citizen is required to have health insurance, or be fined hundreds of dollars by the IRS each year. Kobliner advises signing up for insurance should be “your No. 1 financial priority” because it’ll protect you from unforeseen accidents or illness, and prevent yourself or your family from going bankrupt in the case of an emergency.
If your employer offers health insurance, take it, Kobliner says. It’s almost always cheaper than buying a policy on your own (but keep in mind that you can be covered by your parent’s insurance until age 26.) Before signing up, though, make sure you understand the cost and extent of the plan, including your deductible, or how much you’ll be paying out-of-pocket before insurance takes over.
If you do end up needing to purchase a policy on your own, head over to healthcare.gov to compare plans and pricing.
2. Be smart about paying off debt
Kobliner says “one of the smartest financial moves you can make” is using any remaining funds after covering your expenses — food, rent, and health insurance — to pay off high-interest loans.
“The reason is simple: You can ‘earn’ more by paying off a loan than you can by saving and investing. Paying off a credit card (or an exorbitant private student loan) that has a 15% interest rate is equivalent to earning 15% on an investment,” she writes.
Before tackling any credit card debt, call your credit card company and ask for a lower rate — it works. Then, make sure to pay off “as much of your balance as you can, as soon as you can, each month,” she says. You may also see if you qualify for a lower-rate credit card and transfer your balance.
The bottom line: Always pay back the debt with the highest interest rate first.
3. Start contributing early to your retirement plan
Putting money into a retirement plan as early as you can, no matter the amount, is a smart and easy way to pay-yourself-first. If your company offers a 401(k) plan, take advantage of it. In some cases, employers will offer a contribution match. “That means the company contributes a set amount — say, 50 cents for a dollar — for every dollar you contribute up to a specified percentage of your salary,” Kobliner writes. “That’s free money, equivalent to a 50% or 100% return. There’s nowhere you can beat this!”
Plus, 401(k)s allow you to contribute your pre-tax money, meaning the more you contribute now, the greater the growth (thanks, compound interest) and the more money you’ll have down the road, though you will be taxed when you withdraw the money for retirement. For 2017, the maximum contribution to a 401(k) is $18,000.
And if you don’t have the pleasure of working for an employer that offers a 401(k), open up an individual retirement account (IRA) and contribute the most you can. The maximum contribution for 2017 is $5,500. One benefit of a Roth IRA is that you won’t be taxed when you withdraw the money at age 59 and a half.